The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Huizhou Speed Wireless TechnologyLtd

How Much Debt Does Huizhou Speed Wireless TechnologyLtd Carry?

As you can see below, at the end of September 2023, Huizhou Speed Wireless TechnologyLtd had CN¥1.11b of debt, up from CN¥837.1m a year ago. Click the image for more detail. However, it does have CN¥514.7m in cash offsetting this, leading to net debt of about CN¥593.1m.

A Look At Huizhou Speed Wireless TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.49b falling due within a year, and liabilities of CN¥332.0m due beyond that. On the other hand, it had cash of CN¥514.7m and CN¥821.6m worth of receivables due within a year. So it has liabilities totalling CN¥481.1m more than its cash and near-term receivables, combined.

Given Huizhou Speed Wireless TechnologyLtd has a market capitalization of CN¥5.64b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Huizhou Speed Wireless TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Huizhou Speed Wireless TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 5.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Huizhou Speed Wireless TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥161m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥268m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Huizhou Speed Wireless TechnologyLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.